What rights do investors have in struggling businesses?

Following the news that Patisserie Valerie has gone into administration, Vincent looks at the rights of investors in struggling companies.

Following the news that investors in the company that owns Patisserie Valerie are looking at launching legal action over the collapse of the cafe chain, Vincent Billings comments on investor disputes and what rights investors in struggling businesses have.

Patisserie Valerie was forced into administration at the beginning of January 2019 after it failed to reach a rescue deal with its banks. Administrators of Patisserie Holdings KPMG have named the 71 outlets that will close following the firm's collapse and have announced that 902 jobs will go.

What rights do investors have in struggling business, and is it common for disputes to arise?

Investors or shareholders in struggling businesses have few rights in practice, the reason for this is that investors (who are not directors) do not usually have the power to manage the company affairs, as the management of the company is performed by the directors. When a company is already stressed (whether by poor management decisions or some other reason) the investors/shareholders are periphery and marginalised whilst the company’s directors looks to take decisions and action that will serve to prop up the company, hopefully to maintain the shareholders’ investment. In addition, investors/shareholders are constrained by the fact that any action by shareholders usually takes time to organise such as calling shareholder meetings to raise concerns regarding action taken by the company. For struggling companies time is critical and therefore it is usual for the investors to be marginalised whilst the problems with the company continue.

Under the Companies Act 2006 one duty of company directors (of which there are many) is to ensure that a director acts in a way to promote the company’s success for the benefit of the shareholders as a whole. It is common for disputes to arise where shareholders and investors do not believe that the directors are acting in their interests and investors/shareholders then take legal action such as claiming that they as shareholders have been prejudiced by the directors’ actions.

Will Mr Boxall get his investment back?

Chris Boxall, co-founder of Fundamental Asset Management, said he was "flabbergasted" by the situation involving Patisserie Valerie. Mr Boxall said he was "staggered" and had questions about entrepreneur Luke Johnson, who bought the business in 2006 oversight of the business, as well as former directors and the banks and the auditors.

As Patisserie Valerie have entered into administration (which is an attempt to rescue some or all of the company) it is highly unlikely that Mr Boxall will receive the amount of the investment back from the company unless there is a complete turnaround of the current business (but this looks unlikely). It may be possible for Mr Boxall or the investors to take action against the directors if it is found that they have breached their duty, but it is highly unlikely that the investors will receive anything close to their original investment.

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